Good economic news just isn’t that bad for Treasuries any more.
The reaction in the $12.8 trillion U.S. government bond market to surprisingly strong data has become more muted in recent months, according to Goldman Sachs Group Inc. At the same time, the influence of unexpectedly weak data has grown for longer maturities, while staying about the same for others, the New York-based bank wrote in a report published Tuesday.
That’s a sign investors are taking a dim view of the world’s biggest economy, even as the Federal Reserve prepares to raise interest rates for the first time in a decade.
“Investors’ pessimism on growth could be playing a role in explaining the decline -- and low levels -- of U.S. rates,” wrote Silvia Ardagna, who’s based in London.
Concern that overseas economies are flagging may explain the downbeat bias, after China devalued its currency last week, Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, said in an interview. The Bloomberg Commodity Index has slid to its lowest since 2002.
Traders are scrutinizing every sliver of economic data to gauge whether the Fed has enough evidence of growth to pull the trigger on a rate boost. They see a 48 percent chance of an increase in September, down from 54 percent Aug. 7, data compiled by Bloomberg show. Investors will get another chance to analyze Fed officials’ thinking Wednesday, when the central bank releases minutes from its meeting on July 28 and 29.
Evidence of economic weakness “has been having more of an impact on the Fed view, pushing it out further and further,” Thomas Simons, a government-debt economist with Jefferies Group LLC in New York, said in an interview.
Reactions to economic reports in the past few weeks back up Goldman Sachs’s findings. Tuesday’s news that U.S. new-home construction climbed to its highest in almost eight years prompted a smaller Treasuries reaction than a report last month showing the smallest U.S. wage increase on record.
Ten-year Treasury yields climbed 1.2 basis points in the five minutes after the better-than-expected report on new home sales.
On July 31, 10-year yields moved six basis points in less than five minutes after the second-quarter employment cost index was below expectations.
Even so, Goldman Sachs says an extended string of stronger-than-projected data could push Treasury yields higher.
“In an environment in which investors have become more pessimistic about the growth outlook, the bar for positive surprises could become lower,” Ardagna wrote in the report.